How India is failing its startups

There are three crucial tangents on which any successful startup ecosystem is built — government and policies; domestic consumption; and startup exits fuelled by acquisitive, local companies.

Unfortunately, in a year when the funding winter is worsening, India’s startup ecosystem is struggling on all three fronts.

How the government is failing homegrown startups

Behind the Indian government’s new-found love for all things startup and the headline-grabbing announcements related to incentives, there’s actually an absolute cluelessness, both in terms of policy formation and in helping fledgling startups in areas that really matter.

What is also not helping the cause is grassroots-level corruption, apart from startups’ self-inflicted ethical mess. A few weeks ago, I met an entrepreneur who narrated a story about kickbacks being demanded by an official for a deal to get through. The deal was a potential buyout, and the kickback was based on the valuation of the startup. After deciding against paying any kickbacks, those involved had to live with a much lower valuation than what it was worth.

“How do you fight this?” he told me, frustrated.

Add to that the instances of questionable and unethical practices pointed out by our good friends at The Ken. While you can’t blame lack of policies in these instances, there’s surely a lot that needs to be done in ensuring fair practices. And to achieve that, India needs to move beyond the announcements of funding startups and offering tax-free periods to startups — such incentives are anyway irrelevant.

The government has no business setting up funds for incubating startups. The best incentive the government can offer is to ensure a corruption-free environment, good roads, electricity and all other basic rights.

The whole world is debating how Uber lost to China’s Didi, and how the country’s regulations favour local startups and so on. What gets missed in these debates is that for whatever it’s worth, China ensures clarity, even if it’s protectionism. Days before Uber China and Didi deal happened, the country moved to ensure regulatory clarity by legalising ride hailing apps.

In India, you’re only a notice or a petition away from rediscovering the lack of clarity on taxi sharing apps.

And now, moving on to another rage — should India protect its homegrown startups in the battle against aggressive, cash-rich multinationals?

Couple of months ago, some of India’s top e-commerce companies sat in a room with one of the top Indian bureaucrats in-charge of shaping policies related to e-commerce.

“Do we want homegrown companies to succeed at all?”asked the CEO of one of the top three Indian e-commerce company.

Until recently, I used to scoff at any hint of nationalism or “be Indian, buy Indian” kind of dictum when it’s about the ongoing intense battle between Flipkart and Ola versus Amazon and Uber. But Sharad Sharma, founder of policy think tank iSpirt, and a prolific angel investor, shared some arguments that could force a rethink.

The following two paras are excerpts from an exchange I had yesterday with Sharad:

“There is also this issue of a level playing field for domestic startups. The key issue is to do with regulation. Regulation lags business innovation everywhere in the world. One way to address this is to create regulatory sandboxes. Since we don’t have regulatory sandboxes (yet), there are situations where startups have fallen foul of some existing regulation. When this happens, it’s easier for a foreign startup or MNC to get forgiveness for this inadvertent violation than it is for a domestic startup (today foreign startups enjoy better access to political leaders and therefore easier forgiveness). In China, the reverse is true. It’s easier for a Chinese company to get this forgiveness.”

“Let’s look at examples. Uber got 1.5 years of forgiveness on payments that Ola did not get, and Amazon got forgiveness for having its own supply centres, and not following the marketplace model, which Flipkart did not get. Flipkart had to change its model to comply with the marketplace model. Both Ola and FK were hurt by this favoritism to Uber and Amazon.”⁠⁠⁠⁠

How the $150 billion IT sector is failing India’s startups

And if you thought we’re back to blaming the government as with everything else, the country’s biggest private enterprises, including the progressive technology companies, have failed on their part too. The likes of Infosys, TCS and Wipro have all formed teams to hunt down disruptive startups in markets such as Silicon Valley, Germany and Israel. But when India’s homegrown startups try and get on their radar, all they get is a snub.

Founder of a SaaS (Software as a service) startup narrated a recent meeting he had with one of India’s top three software exporters.

How the $150 billion IT sector is failing India’s startups

“This person specifically told me that his team had been asked to fund startups based only in the Silicon Valley,” he told me last week. “He said the Valley tag looked better on customer pitch presentations.”

Finally, India’s large conglomerates and even mid-sized companies are treating anything homegrown as “low quality.” Few weeks ago, an Indian blockchain startup was in talks with a Mumbai-based conglomerate for selling its solution. The talks went well only until the conglomerate brought in consulting firm Deloitte, which in turn advised them to go with a similar solution from IBM. Clearly, “you still don’t get fired for buying anything from IBM”, at least in India.

“What shocked us was that IBM’s solution was over five times costlier than ours and that didn’t include the consulting fee they may have paid Deloitte,” the person told me. He requested anonymity because open activism can cost future deals in the pipeline.

ThreadSol, a company that tried selling to Indian enterprises relentlessly before taking its software solution to the overseas market, is another case in point. “Many large and mid-sized buyers insisted on offering our solution almost free, or for a price that would not cover even the costs,” Manasij Ganguli, co-founder of ThreadSol had told me recently.

For now, here are three ways the government, conglomerates and the cash-rich Indian software companies can meaningfully contribute:

It’s best for government to stay away from any form of licensing or new approvals linked to the definition of startups. Venture funding and startup incubators are activities best left for the private sector to execute.

India’s biggest consumers of technology (and that includes the government) need to articulate focused programs for buying from fledgling startups with no track records in the sectors.

TCS, Infosys and Wipro can surely afford a little boldness in their M&A approach, make some strategic investments or buyout homegrown AI, blockchain and even SaaS startups.

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